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Earlier this week, domestic equities moved into the top-ranked position on our Dynamic Asset Level Investing (DALI) tool. This change has been touched on in various research articles throughout the week and will be a key point of today’s featured article as well. While the movement of domestic equities into the top position has not been surprising, the timing of the movement has raised some questions from our clients. It took a total of 116 market days for domestic equities to move from its COVID-induced low ranking of fourth out of the six broad asset classes on March 16^th to the top position on August 25^th. It is important to keep in mind, however, that changes on the DALI broad asset class rankings do not occur very often, as the tool is meant to be a long-term view of where relative strength lies across markets.

There have been seven instances where we have seen domestic equities transition back into the top-ranked asset class, including the most recent occurrence, throughout the history of the broad asset class rankings, which dates back to 12/31/2002. In order to examine how domestic equity markets typically fare following a move to the top of the DALI rankings, we pulled forward return data for the S&P 500 Index SPX from each historical date where the asset class regained leadership. In keeping with the long-term nature of the DALI tool, we see SPX typically show relatively muted losses on a near-term basis after a shift into the #1 ranking, however, the market benchmark typically displays significant gains three months down the road, with an average return of 3.36%. These returns are amplified as the time horizon expands, with an average return of 11.66% six months after taking the lead and an average gain of 15.57% over a one year forward return basis.

While these averages paint a positive picture for the long-term view of domestic equity markets following this week’s shift in relative strength, we are working with a small sample size for our examination. Every market environment is going to be different, and the environment in which we currently find ourselves certainly feels unique.

Even as major domestic equity indices have surpassed all-time highs, many investors are still doubtful that this recent rally will be sustained. This is displayed through the American Association of Individual Investors Sentiment Survey, which we track on the NDW system through the AAII Bull-Bear Spread AAIISPREAD. This reading depicts the percentage of those that are bullish in their market outlook minus those that are bearish, and based on the latest numbers that were released Thursday, we still have more bears than bulls as the reading sits at -7.54%. In addition to the normal chart of this reading, we have also taken these readings and smoothed them out via a 4-week moving average shown on the AAIISPREAD4WK chart. With data from this week, the 4-week average comes in at -13.99%, which did lead to a reversal up on the chart to -14. In looking at the history of this reading compared to price levels of the S&P 500 Index, we have never seen the 4-week spread this low while the market sits at all-time highs. Other times when the reading was low and SPX was near highs include February 1991, September 1992, and May 2013, which were all in the midst of prolonged periods of growth for domestic equities.

Earlier this week, we saw U.S. equities surpass fixed income for the #1 spot in DALI after having fallen from grace back in mid-March. On Wednesday, we spelled out the impact of this most recent ranking change across the suite of Tactical Tilt Models, all of which increased U.S. equity exposure at the expense of fixed income. Because there are now more than 5 signals separating U.S. equities and fixed income, today, we want to provide a quick review of the DALI-based strategies that employ the signal buffer rule and their allocations now that U.S. equities is firmly in the top spot. We do note that since the DALI-based strategies increased U.S. equity exposure earlier this month when the U.S. equities asset class surpassed cash for #2, most of the strategies that use the 5 signal buffer rule were unaffected by this most recent change. As it stands today, U.S. equities has 233 signals in its favor, lengthening the spread between #1 and #2 to nine signals. Below the DALI strategies update, we highlight one of the most-improved broad sectors within the DALI US sector breakdown and take a closer look at its corresponding sub-groups.

DALI-based Strategies Update

• DALI Asset Allocation - No Bogey: One of the most basic strategies, DALI No Bogey assumes owning the top two ranked asset classes in an equal-weighted fashion. 

• DALI Asset Allocation - with Bogey: Like the DALI No Bogey strategy, "DALI with Bogey" owns the top two ranked asset classes, but it also employs the Cash Bogey Check. Cash can move in as a place holder, should one of the top two ranked asset classes in DALI fail their respective Cash Bogey Checks. The DALI with Bogey strategy is 50% fixed income and 50% US equities since both asset classes are passing their own Cash Bogey Checks.

• 3 Legged Stool: The 3 Legged Stool Strategy, as the name implies, consists of three pieces. Two of those "legs" are allocated to the top two ranked asset classes in DALI, and the third leg is designed to provide constant equity exposure. Within this strategy, the managed equity exposure can take shape in many different ways, as it offers the opportunity to further customize the allocation through individual stock selections, ETFs, mutual funds, UITs, or a combination of all.  One third is allocated to US equities, one third to fixed income, and one third to a constant equity exposure piece. Note: Those running this strategy with a Cash Bogey have the same allocation since US equities and fixed income are passing their Cash Bogey Checks.

• DALI Tactical Allocation: The Tactical Allocation, or "6-Legged Stool" as this strategy has come to be known in some circles, is a strategy where US equities, international equities, commodities, and fixed income account for a constant 15%, so 60% of the total portfolio. The other 40% is split evenly between the top two ranked asset classes in DALI. The result is a portfolio that maintains exposure to four asset classes at all times but uses DALI to overweight areas of leadership. Note: Those running this strategy with a Cash Bogey have the same allocation since US equities and fixed income are passing their Cash Bogey Checks.

• DALI Flexible Allocation: In the DALI Flexible Allocation Strategy, each asset class is weighted in the portfolio based on the percent of total "buy signals" the asset class maintains relative to the current sum of "tally" signals. In this strategy, you are keeping exposure to all six asset classes at all times; however, depending on where the strength is in the market, you will be overweighting and underweighting different asset classes at different times. Currently, the Flex Allocation strategy is overweight US equities income at 21.5% and provides 20.6% to fixed income, 18.1% to cash, 14.8% to currencies, 13.6% to commodities, and 11.3% to international equities. The DALI Flex Allocation is the only strategy that can see allocation changes even without a change in actual rankings in DALI, as it is all dependent on the tally rank numbers. The strategy is evaluated monthly.

• DALI Tactical Tilt Allocation: Our Tactical Tilt program was built to both respect strategic allocation boundaries, but also allow us the be adaptive to leadership changes. Each asset class is assigned a minimum allocation and a maximum allocation based on traditional strategic allocation concepts. However, using DALI as the driving force for the tactical input, the strategy can overweight asset classes that are in a position of leadership, allowing the maximum threshold to be met. In a sample moderate "Tilt" allocation, an offensive portfolio could have 75% exposure to US equity, while a sample defensive portfolio could be only 20% US equity. With the changes this week, all three Tilt portfolios have increased their US equity exposure at the expense of fixed income.

DALI US Sub-Sector Strength

When we dig into the DALI sector breakdown for U.S. equities, we can see where the shifts in strength are occurring across the U.S. equity landscape using the tally history link. Over the last 30 and 90 day periods, it has been the industrials sector that has gained the most tally signals, signaling that this is an area that is gaining traction. Recall that right before the COVID-19 sell-off swept across global markets, the industrials sector ranked third and had been considered a "high-RS sector," i.e., ranked in the top half of the sector rankings, since October 2016. That all changed on March 9, 2020, when industrials slid from #3 to #6 in just one day and continued to deteriorate even further over the next four months, where it moved as low as the tenth-ranked asset class in late-April and early May.

As it stands today, the industrials sector ranks seventh and trails the basic materials sector by just eight tally signals, so be sure to turn on your DALI alerts to be notified of any future sector or asset class changes. Despite being down -4.20% on a year-to-date basis, the broad industrials sector, using the Industrial Select Sector SPDR Fund XLI as a proxy, has managed to outperform the SPX on a 30, 60, and 90-day lookback. Additionally, XLI is up over 60% since the market bottom on March 23, outperforming the SPX by over 4%.

Industrials & Industrials Sub-Sectors

While the broader industrials sector has gained momentum over the last few months, not all areas within the sector are exhibiting solid long-term momentum. To identify which sub-sectors are participating more than others in the industrials sector, we ranked the +128 S&P 500 sub-industry groups by long-term relative strength. Currently, trucking and air freight & logistics both rank in the top quintile (best) of the SPX sub-industry groups, while airlines rank in the bottom quintile (worst) due to the fact that we are seeing more “stuff” being transported versus people. With Friday’s intraday action, the Dow Jones Transportation Index, the U.S.’s first stock market index that still tracks 20 of the most important companies in the sector, printed an X at 11,280, marking a new multi-year high and now sits about 3% off of its all-time high reached in September 2018.

Airlines

Recall that airlines were one of the hardest-hit areas of the U.S. economy as a result of the global pandemic, causing air travel to come to a virtual standstill. Although airlines are operating today, the International Air Transport Association, which represents most of the world's major airlines, does not expect the airline industry to recover from the coronavirus until 2024 (source: Business Insider). Many airlines charts, such as Southwest Airlines Co. LUV shown in the image below, have started to form big bases; however, they have yet to break out of them. In the case of LUV, a move to $49 or higher would move through resistance dating back to March and would signal that demand is in control, making the stock more actionable. We suggest waiting for charts like these to form bases as they continue to find a bottom. Although they may "seem" to have put in bottoms, we need further evidence of strength, especially as these companies could face lingering problems long after the virus is under control.

Trucking

Trucking, on the other hand, has thrived due in part to online shopping/e-commerce that has increased as a result of COVID-19 and the global economic shutdown. Trucking is the highest-ranked industrials sub-group at this time sitting in the seventh spot. The trucking group includes names like ODFL and J.B. Hunt Transport Services, Inc. JBHT. In the image below, we have a chart of JBHT. This stock is a solid 4 for 5'er that has given three consecutive buy signals and is trading in an overall positive trend. With yesterday's market action, JBHT printed an X at $144, marking a new all-time high for the stock. This recent rally has pushed JBHT into overbought territory with an OBOS% reading of 76%, so those looking to initiate new positions may want to scale in here or buy on a pullback/normalization of the trading band. From here, initial support sits at $126. Year-to-date, JBHT is up 22.28%, outpacing the SPX's return of 7.85%. 

Air Freight & Logistics

Similar to trucking, the air freight & logistics sub-group is thriving due to the increased demand for goods versus services. Household names like United Parcel Service, Inc. UPS, and FedEx Corporation FDX are driving the strength of the air-fright subsector, both of which are perfect 5 for 5'ers. In its most recent earnings call, FDX reported a 72% increase in residential volumes versus last year and a 20% increase in FedEx group revenues (source: MarketWatch). FDX, shown in the image below, printed a new all-time high with today's action at $220. This stock has given five consecutive buy signals, confirming that demand is firmly in control. Additionally, FDX is one of just five SPX stocks that have moved to market RS buy signals over the last three weeks, telling us that FDX now possesses long-term strength when compared to the broader market. Year-to-date, FDX is up 44.30%, outpacing the SPX by over 36%. Note FDX is more than 150% overbought so those looking to initiate new long exposure may best be served on a pullback. From here, initial support sits at $168. FDX expects earnings on 9/15.

To generate the list of high-RS industrial stock ideas below, we used the Security Screener tool, housed under the Security Selection menu, to filter for high-RS, actionable industrial names within the S&P 500 Index. After adding a handful of screens to our search, we generated 17 ideas that we've listed in the table below. Note: if you run this screen any time after 8/28, your results may differ slightly due to the nature of the criteria. 

High R.S. Industrials Stock Query Criteria:

• Universe: S&P 500 Index
• Broad Sector: Industrials
• Technical Attribute: 3, 4 & 5
• Trend: Positive
• P&F Signal: Buy
• Overbought/Oversold (%OBOS): < 50%

High-RS Shopping List: SPX Industrials

Symbol	Name	Price	Tech Attrib/Score	DWA Sector	Overbought/Oversold
ALLE	Allegion PLC	103.24	3	Protection Safety Equipment	5%
AMCR	Amcor PLC	11.07	3	Business Products	28%
AOS	A.O. Smith Corporation	49.20	4	Building	5%
APH	Amphenol Corporation	108.10	5	Electronics	47%
BA	The Boeing Company	174.20	3	Aerospace Airline	-12%
GRMN	Garmin Ltd.	102.57	5	Electronics	24%
HWM	Howmet Aerospace Inc.	17.43	4	Aerospace Airline	35%
IT	Gartner, Inc.	130.72	3	Business Products	37%
J	Jacobs Engineering Group Inc.	89.08	3	Building	24%
PAYX	Paychex, Inc.	76.54	3	Business Products	27%
PCAR	PACCAR Inc.	86.33	4	Autos and Parts	46%
PKG	Packaging Corp of America	102.10	3	Forest Prods/Paper	15%
PKI	PerkinElmer, Inc.	114.50	5	Electronics	38%
ROK	Rockwell Automation, Inc.	232.01	5	Electronics	42%
ROP	Roper Technologies Inc.	428.06	5	Machinery and Tools	28%
TDG	TransDigm Group, Inc.	498.32	5	Aerospace Airline	49%
ZBRA	Zebra Technologies Corp	277.26	5	Electronics	18%

As major domestic indices continue higher and make all-time highs, the S&P 500 Index Funds group ranks atop the Macro view on the ACGS page with an average group score of 4.77, which is an all-time high for the group going back to 2002. Not only has the S&P 500 Index group been showing historic levels of strength, the US Equity Core Percent Rank is currently 94.37%, further evidencing the strength of the core US equity market. While a strong core is a major positive sign for domestic equity markets, the run-up has put the S&P 500 Index Funds group into overbought territory with an overbought/oversold reading of 133.98%. The evidence for large-cap domestic equity funds is overwhelmingly positive, but the historically high score and heavily overbought OBOS% reading for the group could be an indication for investors to tread a little more cautiously before entering large new positions. The S&P 500 Index Funds group has been above the 4.50 mark before and has continued to post positive returns after, most evidently in late 2019 until the COVID-19 sell-off where the S&P 500 Index SPX returned 7.61% (11/29/2019 – 2/14/2020) and currently where the SPX has returned 5.77% since crossing above the 4.50 mark on August 3.

Despite the two previous times the S&P 500 Index Funds group crossed above 4.50 mark, leading to heavy selling in late 2018 and early 2020, there isn’t any more evidence to justify expecting such moves again.  The evidence is still very positive for domestic equities on the ACGS page although some of the stronger groups like Large Cap Growth and S&P 500 Index Funds look like they are overextended from a historic perspective. The All Fixed Income group has softened recently dropping below the 4.00 mark, but still maintains an average group score of 3.92 and a positive score direction of 0.55.  This is another positive sign for US equity groups as fixed income groups typically do not score strongly during periods in which the core US market is as strong as it is today, which can be looked at more in-depth here.

As the core US equity market remains red hot, it is important to evaluate the risks associated with the group. Using it as a proxy, the S&P 500 Index group possesses strong score characteristics but its recent performance has put it into extremely overbought territory where those wishing to take new long positions may want to wait for price normalization or a pullback. The recent tick south in the All Fixed Income group relative strength adds more validity to the strength of the S&P 500 Index group, but we are still seeing fixed income groups on the ACGS possess strong average scores and most bond sleeves should remain beneficial to your total asset allocation. Moving forward, be sure to stay up to date on major market trends on the Asset Class Group Scores page and make sure you and your clients are allocated accordingly.

Daily Option Ideas for August 28, 2020